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Why is there a small farmer problem?

    Falling prices

    Falling prices for agricultural commodities is the foundation of the financial crisis for small farmers.

Historical research shows that agricultural prices varied according to the seasons and other events such as war, inflation or plague but there was little long-term change in real prices until 1815.

This seems to the turning point for a major historical shift.

When the Napoleonic Wars ended in Europe grain trading was resumed and prices fell.

They have been falling ever since.

There have been a few spikes of higher prices during periods of war or shortages caused by drought but the long-term trend has been down and down. In the last year (2007 to 2008) there has been a spite in the price of most agricultural commodities but if the price of wheat in 1815 is indexed for inflation the present price would be over Euro 1000 per tonne. It has not reached anything like that level.

A farmer would receive the same for a quintal as he now receives for a tonne.

The small farmers' financial problems would not exist.

Global trade

As well as the long-tern downward trend in cereal prices the effect of global trade and food aid as been to reduce the effect of drought and other disaster on local prices.

In the past, before the era of cheap transport, prices would rise sharply during years of shortage. Farmers could benefit. Their yield would be low but they would be compensated to some degree by higher prices.

Now low yields do not produce higher prices. Farmers' incomes fall more.

Not all agricultural prices have fallen at the same rate as grain.

Commodities such as wheat that are easily traded on world markets have fallen in real terms by a very large amount.

Commodities such as fibre crops that face competition from synthetics have fallen even more but the good news for small farmers in the WANA region is that sheep meat from local breeds has been less affected than most other agricultural products.

Table 1

    The price of sheep meat in various countries. 

COUNTRY

Price per kg in US$

Price per kg in kg of barley

Price per kg in minutes of time for average worker. 

AUSTRALIA

1

8

11

FRANCE

4

25

50

ALGERIA

16

70

840 (14 hours)

    The above figures demonstrate very clearly the high absolute price of sheep meat in Algeria but they also demonstrate how sheep meat prices are high in relation to grain prices and average wages.

    The above figures show that Australia is the workers' paradise in terms of the consumption of sheep meat but the figures can be reversed.

The figures also shows why it is possible to send Australian sheep half way round the world to supply markets not only in the Arabian Gulf but in Algeria.

    What is bad for the consumer in Algeria is good for the farmer.

Table 2

    Table 2 shows the number of sheep of 17 kg carcass weight that need to be sold by a farmer to receive a return equal to the wage of the average worker.

It is assumed that the farmer receives half the retail price of the meat. This is certainly high for Australia where on average farmers receive less than half but is realistic for Algeria as the supply chain has not yet developed so many intermediaries.

In most of Algeria farmers still supply butchers who in turn supply consumers.

COUNTRY

Kg of sheep meat purchased by worker per week
if total wage spent on meat (40 hours per week)

Number of sheep that need to be sold by a farmer in one year to produce a return equal to the average wage. 

AUSTRALIA

218 kg

1356

FRANCE

48 kg

298

ALGERIA

2.9 kg

18

 

    Why have prices fallen for nearly 200 years?

      New technology has been the major reason for the fall in prices over the last two centuries.

New technology has increased the yield of crops and animals throughout most of the world.  The technology used by agriculture includes a wide range of scientific disciplines.

Fertilisers, herbicides, insecticides and fungicides have all been developed out of an understanding of chemistry. Plant and animal breeding has improved yield through an understanding of genetics.

Mechanisation has reduced the labour requirements of agriculture.

Output of agricultural commodities has also risen because of the new land brought into production in the Americas, Australia and Russia but given the huge increase in human population over the last 200 years the increased output from the new lands cannot be blamed for the fall in prices.

The third important factor that has accelerated the fall in prices for agricultural commodities on world markets in the last half century is the enormous subsidies paid to farmers in Japan, USA and Europe.

The figures are so large that they have become incomprehensible.

One figure that brings some reality is the average payment made by taxpayers to cows in Europe, USA and Japan is greater than the average income for humans in Africa.

These subsidies have encouraged farmers to expand production and once the local market had been satisfied the surpluses have been dumped on world markets at prices below the price paid to the local farmers.

The amount of grain traded in this way is not a large percentage of world production (one has to keep remembering the enormous production of grain in India and China that never enters world trade or even local trade) but the marginal effect has depressed world grain prices to a low level until the current spike in prices.

The cities of the WANA region have benefited from the low world prices as WANA is a net importer of grain and other agricultural products.

Farmers in WANA were protected from cheap imports by subsidies but these have been reduced or dismantled altogether and they are now trying to compete with imported grain that is often priced below cost.
 

    But what about the benefits of technology?

    Technology that increases output has been the major cause of falling prices for agricultural commodities but the extra output produces more income so why should farmers complain?

Farmers throughout the world are on a tread mill.

They are forced to expand output to try to maintain income.

As they collectively expand production the price per unit falls and the additional income fades away. The best they can expect is the same.

They must try and produce even more to prevent their income falling.

For the WANA region the position is particularly difficult as so much of the technology that has transformed grain production in the temperate northern zone and the tropical zones of Asia has failed.

In popular terms it was called the "Green Revolution" in Asia but a similar revolution occurred in the temperate regions over a longer period.

There were a number of ingredients for this revolution but they started with nitrogen. Cheap nitrogen fertiliser was the starting point. It is certainly cheap and available in the WANA region but the Green Revolution has not occurred.

The next stage after the application of N was to breed crop plants that could respond to the high levels of N in the form of harvestable grain.

After this the crops became more profitable and it was possible to slot in other technology in the form of herbicides, fungicides and insecticides.

All this research work has been done in the WANA region but without the key nitrogen response the Green Revolution will not take off.

Perhaps better soil testing and leaf analysis can improve the effectiveness of nitrogen fertiliser in the future but currently nitrogen fertilisers are unreliable in the dryland areas and have failed to produce the startling yield increases they have in the temperate and tropical zone.
 

    For small farmers ...
 

    For small farmers throughout the world technological development has been difficult because so much technology carries with it economies of scale.

The larger the scale the cheaper the per unit price.

Mechanisation is the most obvious example.

As tractors and other machines become bigger they are still driven by one person.

Their price does not increase as much as their capacity.

In fact small harvesters can cost more than medium sized ones.

For other technology the influence of scale is indirect. Fertiliser, herbicide, insecticides and fungicides are applied and the cost is the same per hectare for large and small farms but to use these technologies (and many others) effectively requires knowledge, skill and training.

Knowledge comes in chunks.

Once a farmer has learnt to fine tune his fertiliser applications that knowledge can be applied to 2 ha, 200 or 2,000.

Above that figure the area becomes too dispersed and more knowledge managers are needed.

At the bottom end of the scale it expensive for small farmers to acquire the knowledge to make the best use of technology for all his farm enterprises.

The knowledge problem for small farmers is increasing.

Often technology has been introduced in the form of a blanket recommendation or simple rule of thumb. That led to wasteful use of chemicals and pollution of soil and food.

The trend is now to encourage the smart use of these chemical inputs with techniques such as "integrated pest management" and the need for knowledge is increasing.

      The cheap energy trap

    The new technology has come in large part from scientific advance (although farmer innovation should not be ignored) but its application has often depended on cheap energy.

Mechanisation is the prime example.

Cheap energy has made the use of tractors and other machine extremely competitive but for small farmers the low cost of mechanical farming is off set by the high capital cost of machinery when it is not used to full capacity.

A tractor may be cheap to run on untaxed diesel but if it is only used for a few hectare the cost of capital repayments and interest places a crippling cost on those few hectares.

The large farmer can benefit from the cheap energy but not the small one.

If the farmer returns to traction animals he is also caught in a dilemma.

In the WANA region the preferred livestock are sheep. They are well adapted to the climate - that is their breeding pattern fits the seasonal production of feed.

They are excellent at foraging Mediterranean legumes such as medic and sub clover.

Sheep meat commands a high price in the market but they are not suitable as traction animals. The farmer must use a traction animal such as a mule that has little dual purpose value.

If one considered the potential output in terms of ten sheep instead of one mule it is obvious that the energy supplied by the mule is not cheap. Large farmers can access cheap energy but not small ones.

In 2008 cheap energy is rapidly disappearing but the farming system must adapt to cope.

The obvious changes that reduce energy consumption are:

* Shallow cultivation instead of deep ploughing.

* Legume nitrogen for crops and pasture instead of chemical nitrogen.

    The family farm

    Small farmers are also family farmers.

This require a completely different approach to economics and farm management accounting.

Small farmers do not necessarily separate their family budgets from their farming budgets.

A decision to buy a tractor is balanced against a family car. Other farm purchases are balanced against domestic expenditure or education for children.

Family labour also needs to be treated separately.

There is family labour available on most small farms that has a zero opportunity cost.

That is there are no reasonable alternative employment opportunities that could provide wages.

Cheap family labour is therefore preferred to payment to contractors.

For a large farmer the sums are quite different.

He employs labour and can make the choice between permanent employees and contractors.

For the small farmer the family is the permanent labour force. Having established the desirability of employing the family labour where ever possible it is important not to carry the argument too far.

Family labour may not have a high opportunity value in terms of alternative paid employment but there are many other family tasks to carry out and these should not be disregarded merely because they are unpaid.

The substitution of contractors with family labour must be balanced against the quality of life for the family.